Our studies have indicated to us that when we are selling option premium that the option with an expiration closest to 45 days to expiration (DTE) is the best choice to take advantage of Theta (time decay). We have noticed that in the setup we most frequently use for our studies that when we hold a trade to expiration there is an overlap period of about 15 days every month in which two trades are on simultaneously. Is there a better way to utilize our capital?
This overlap of trades requires the additional capital of two trades. We do believe in managing winners but since we do not know if we will have the opportunity to do so we need to keep capital in reserve in case we will have two trades on at the same time. So how does such a strategy compare to one in which we traded twice as many contracts less frequently, such as in high Implied Volatility Rank (IVR) environments? Our study was conducted in the SPY (S&P 500) from 2005 to the present. Using options with 45 DTE we sold Dynamic Iron Condors comprised of a short 20 Delta Call and Put and a long 10 Delta Call and Put. We then compared initiating this strategy every month as compared to initiating the strategy only if was above 35% and reallocating immediately after managing at 50% of max profit when High IV was available.
A table of the results compared the number of trades, amount of winners, average number of days in the trade and average P/L per trade. The table showed similar results in both strategies. A deeper look revealed more. The high IV strategy tied up roughly ½ the capital for ½ the time. That would allow a trader to double his size, considering that the non high IV strategy required keeping capital in reserve. Another table showed the huge increase in the average and net P/L as well as a decrease in the days required for a $10 profit.
For more on Dynamic Iron Condors see:
tasty BITES from May 19th, 2015: "Earnings | Dynamic Iron Flies”
tasty BITES from September 2nd, 2015: "Iron Condors | Fixed vs Dynamic”
Strategies For Your IRA from March 14th, 2015: “SPX Dynamic Iron Condors”
Watch this segment of Strategies For Your IRA with with Tom Sosnoff, Tony Battista and James Blakeway from our research team for the key takeaways and the results of our study on the best way to utilize our capital.
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